OVERVIEW
Sellers Remain Firmly In Control

Last week’s market action ended on a sour note, halting what seemed like the start of a recovery. Wall Street's holiday optimism quickly dissipated on Friday, with all three major indexes closing lower in a broad sell-off. Even tech and growth stocks, which had been leading the charge earlier in the week, couldn’t escape the downturn. This abrupt pullback spoiled what is typically the "Santa Claus" rally, a historically positive period for stocks between Christmas and New Year’s. In fact, since 1969, the S&P 500 has usually gained 1.3% during this time, but this year’s rally has failed to materialize.

One of the key drivers of this weakness is the rise in U.S. Treasury yields. The 10-year Treasury note surged to its highest level in over seven months earlier in the week, settling around 4.63% on Friday. Higher yields put pressure on growth stocks, as they increase borrowing costs for companies and make bonds a more attractive alternative to equities. This shift in investor sentiment is causing money to flow out of the stock market, creating broader headwinds for the equity space. As yields continue to climb, it’s clear that the market is facing a more challenging environment heading into the new year.

Nasdaq

Over the past two months, the Nasdaq’s QQQ, a capitalization-weighted ETF that tracks large and mega-cap growth stocks, has been the top performer. It not only fared the best during the broad deterioration in market breadth but also showed the strongest recovery once selling pressure hit. This selling pressure culminated in a sharp 3.6% drop on December 18th, where it broke below both its rising daily 10-EMA and its 20-EMA in a single session.

What followed was a strong rebound, initially appearing as a solid reversal setup. The bounce off its rising 50-EMA came with a surge in volume, and the QQQ quickly recovered the key 10-EMA and 20-EMA levels. According to Wyckoff Theory, a proper recovery should be supported by high relative volume, and this session fit that description, making it look like the market was poised for a quick recovery.

However, Friday’s action told a different story. While there was still a high relative volume red hammer candle, which is typically a bullish sign, a deeper look into the consistent behavior of stocks and our daily scans suggests otherwise. The recovery might not be as strong as it initially seemed, and the market's overall condition may still be fragile.

The equally weighted version of the Nasdaq (QQQE) highlights just how weak the underlying market condition is, even within one of the strongest segments of U.S. equities. The QQQE has dramatically underperformed compared to its mega-cap counterparts, which are largely keeping the broader U.S. stock market afloat.

Despite the strength of the mega-cap names, the QQQE is trading below all of its key exponential moving averages (10, 20, and 50 daily), as well as its weekly 10 and 20-EMAs. This technical weakness was further emphasized on Friday when the QQQE saw a high-volume rejection while attempting to reclaim these key levels.

S&P Midcap 400

Midcaps (MDY) have been one of the worst-performing capitalization groups in the market recently. On Friday, they faced a significant rejection at their declining 10-EMA and are now down nearly 8% from their all-time highs reached in late November.

Russell 2000

Small caps are also experiencing a dramatic drawdown, moving in lockstep with midcaps. On Friday, they faced a rejection at their declining 10-EMA for the second time, and now both the IWM and MDY are struggling to defend against further markdowns. If the selling pressure continues, these indices could test their rising 200-EMAs.

This isn't surprising, as when money flows out of the equities market overall, it's typically the smaller, riskier groups that take the hardest hits. Large-cap companies like NVDA, AAPL, GOOG, and META, which have valuations in the hundreds of billions or even trillions, tend to perform well regardless of broader market trends due to their size and dominance in the market.

DAILY FOCUS
This Is The Part Where You Wait

The equities market tends to trend higher about two-thirds of the time, thanks to the value businesses create over time. However, during pullbacks and corrections, patience becomes a trader’s best asset.

Right now, focus on scanning for relative strength leaders—stocks that are holding their rising 10- and 20-EMAs while the broader market pulls back. These stocks are showing resilience and are likely to outperform when the market turns. But don’t rush in.

Now is not the time to force trades. The market's direction is uncertain, and we don’t yet know if we’re in the midst of a deeper, longer correction. Remember, the best breakouts often happen after a correction, so view this period as a blessing, not a setback. It’s a time to analyze past performance, refine your strategy, and prepare for when the market stabilizes. The set-ups you’re waiting for will return, and when they do, you’ll be ready to capitalize on them. Stay patient, stay disciplined.

WATCHLIST
The Relative Strength Leaders

KVYO: Klaviyo, Inc. Series A

• KVYO continues to dominate our relative strength scans, showcasing resilience in a tough market environment. Even as the broader market faced significant selling pressure on Friday, KVYO held its daily 10-EMA level, providing strong support and demonstrating its strength.

• Currently, the stock is seeing a breakout in premarket trading. While we won't be entering the trade just yet, it's important to monitor how KVYO behaves once the market opens. Breakouts like this often face resistance and may fail, but regardless, KVYO is showing clear signs of strength and is one of the few technology stocks performing well in this environment.

VIST: Vista Energy S.A.B de C.V.

• VIST, an energy stock, has shown surprising strength in the past week, even while the broader market is struggling. This is noteworthy, as it typically happens when sectors like tech and other cyclical groups begin to break down.

• VIST has been forming higher lows and recently saw a dramatic increase in both volume and price action, signaling potential strength. Now, with a premarket breakout above its declining 10-EMA and 20-EMA, it’s worth watching closely to see if this breakout holds.

• While we won’t be entering a long position at this point, it’s important to observe which sectors are leading the way. If more energy stocks continue to break out and hold their gains, it could signal potential opportunities for entries in this group, making it an area to monitor closely moving forward.